Whether you have a disposable income after you have made agreements with your priority debts or not, there are options to deal with your debts. There are sample letters in the page on contacting your creditors.
Depending on your situation you may have more than one option for dealing with your non-priority debts. For example, you might choose a short term informal option like extended holds to allow you time to complete a long term formal option like a debt relief order. The options available to you are listed below with a brief summary, and a link to more information.
The options available to you are listed below with a brief summary and a link to more information.
Informal debt options
These are debts that do not involve any court action, and include:
- extended holds – a hold of usually six months can be requested if you are not able to repay your debts for a period of time. This is not a long term solution.
- token payments – usually an arrangement of £1 to £5 per month, showing that you want to repay the debt. This is not a long term solution.
- pro-rata arrangements/debt management plans – shares your available income equally between each of your creditors based on the amount you owe them. You pay the arrangements yourself or set up a debt management plan where you make a single payment that is passed onto your creditors. Make sure you use a charity like StepChange or PayPlan as they are free of charge.
- full and final settlement – if you have a sum of money available you can consider offering full and final settlements to your creditors. This is when a lump sum of less than the total debt is accepted to settle the debt.
- write off/partial write off – you can try this before formal debt options if you have no available income or capital (savings or investments), and your situation is unlikely to improve in the foreseeable future.
Formal debt options
These involve some kind of court order. Get help from one of the organisations offering free advice if you are considering one of the options below.
- Individual Voluntary Arrangement (IVA) – an IVA is a formal arrangement made through the county court where you pay an agreed amount off your debts over a fixed period (for example, five years). The rest of your debts are then written off after your final payment on the IVA is made.
- bankruptcy – bankruptcy is a way of recognising that you are unable to pay your debts in a reasonable amount of time. It can be seen as a last resort but ca be a good option, particularly if you rent your home and have no assets. Your unsecured debts are normally written off.
- Debt Relief Order (DRO) – a DRO is a way to deal with your debts if you owe less than £20,00 and do not have much spare income or own your home.
- administrative order – this is an alternative to bankruptcy and Debt Relief Orders if you have at least two debts totalling £5,000 or less and a County or High Court Judgement (CCJ) against you.
Details of options
This is where a six month hold is requested as you are not
able to repay your debts for a period of time. This will not resolve your debt
problems, so it’s important to work towards a long term solution.
You should send a copy of your financial statement with a sample holding letter to ask your creditor to suspend interest and other charges so your debt does not continue to grow (they can refuse, but keep asking).
- Allows you to focus on making payments to your
priority debts, and helps maintain goods and services.
- Provide you with some time to look at long term
solutions without constant contact from creditors.
- Your creditors will understand your situation,
and can make informed decisions about collection of the debt.
- Creditors do not have to hold recovery, they can refuse your request and continue interest and charges
- This may affect your credit rating
- It does not repay your debts.
Token payments are a low arrangement offered to a creditor.
They can be anything from £1 per month and shows that you want to repay the
debt. Token payments will not resolve your debt problems, so it’s important to
work towards a long term solution.
You should send a copy of your financial statement with a sample token payment letter to ask your creditor to suspend interest and other charges so your debt does not continue to grow (they can refuse).
- Sometimes token payments are the only way for a creditor to agree to hold interest and charges, and prevent recovery action
- You are paying something towards the debt whilst you look into long term solutions
- The creditor may agree to take no further action whilst token payments are being made
- Token payments use money you might struggle to find
- There may be costs involved in making payments, consider using standing orders or direct debits
- This may affect your credit rating
- It does not repay your debts
Pro-rata arrangement/debt management plan
If you have
some available income to pay towards your non-priority debts, you can offer a
fair (pro-rata) share of your available income to each creditor based on the
amount you owe them.
- This is a fair and transparent method of
- It is recognised by courts and widely accepted
- You can increase payments when circumstances
- You can reduce offers if your circumstances get
- Creditors may refuse your offers*
- Creditors may refuse to freeze interest and your debts may grow***
- Creditors may only consider offers made through an advice agency – in this case you can complain to the Financial Conduct Authority (FCA).
- Creditors may still take court action against you.
- This may affect your credit rating.
- You must make the payments yourself.
- Many creditors only accept reduced offers for a limited time and may ask for regular reviews.
*it is always worth asking your creditors to reconsider
How to work out pro-rata arrangements
- Use your completed financial statement to see how much disposable income you have after you have paid household bills and priority debts, but without paying anything to your non-priority debts.
- Add up the total amount you owe to your non-priority debts (Part E of the financial statement).
- Take one non-priority creditor at a time and divide their debt by the total debt and multiply the result by the amount of the disposable income, the sum looks like this:
Amount owed to individual non-priority creditor ÷ Total owed to all non-priority creditors x remaining disposable income = repayment offer
- Write the pro-rata offer on the financial statement against the creditor, and reduce your available income before you work out the next offer. You should not have any disposable income after you work out your last repayment offer.
You will need to contact your
creditors to offer your arrangements, remember to ask them to freeze interest
and charges. If a creditor doesn’t agree to your offer don’t give up. Write to
them again and tell them if other creditors have agreed to your offers.
You can use the sample letter to write to your creditors with a copy of your financial statement to ask them to suspend interest and other charges so your debt does not continue to grow (they can refuse).
If you need help completing your financial statement, or calculating pro-rata arrangements contact the Debt Advice Team or an organisation that offers free advice.
Debt management plan
If you can afford to make smaller regular payments towards
your debts and want an easy way of paying, you could consider a Debt Management
A debt management charity/company will go through your financial statement. If you have a disposable income, and are able to get out of debt in a realistic time, they will calculate pro-rata arrangements for you.
You then pay the total amount of your pro-rata arrangements to the debt management charity/company , and they will send on each payment to your creditors.
Some debt management companies charge a fee to arrange a DMP plus an additional monthly management fee for as long as the DMP lasts. This will take you longer to repay your debts.
Reading Borough Councils Debt Advice Team can give you
information/make a referral to a debt management charity who will not charge
you to have DMP.
- This is fair and transparent method of
- The debt management company will negotiate with
creditors on your behalf – their offers are more likely to be accepted and
interest/charges may be frozen.
- The debt management company involved would be
responsible for administering all payments to your creditors – you just make
one monthly payment to the debt management company.
- You can increase your payments if your
- You may not be able to make reduced offers if your circumstances get worse and you cannot afford to maintain higher repayments
- A DMP will not work as well if creditors won’t accept offers or freeze interest
- This may affect your credit rating
Full and final settlements
If you have some money either from savings or
family/friends, you can consider offering full and final settlement offers to
your creditors. This is when a lump sum of less than the total debt is accepted
to repay the debt because the creditor agrees to write off the rest of the
Seek advice before offering full and final settlements to
your creditors, so you can be supported to work out what to offer and have the
confidence to make the offers to your creditors. You can also be supported to
ask again if your offers accepted the first time.
- You repay less overall to clear the debt.
- It is easier than having to maintain an
arrangement over a longer period.
- If only some of your creditors accept the
offers, it would reduce your total debt, and may open up alternative options to
deal with your debts.
- Creditors may report a full and final settlement
to credit reference agencies as a partial settlement, making it difficult to
get credit in the future.
- If a creditor becomes aware of the total sum of
money you are planning to use to repay your debts, they may attempt court
action to try and get more money for themselves.
Write off/partial write off
This can be a good option to try before formal debt options
if you have no available income or capital (savings or investments), and your
situation is unlikely to improve (or may get worse) in the foreseeable future.
You can ask for all or part of the non-priority debt to be
written off. If the creditor agrees, it means they will not collect any further
payments and removes the debt from their records.
Whilst most creditors accept the need to write some debts
off, they don’t always agree when first asked.
- If the creditor agrees it will reduce pressure, and the total amount of debt
- It will be accepted that further recover action is not appropriate
- The creditor may not easily accept to write off debt
- This may affect your credit rating
Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement (IVA) is a formal
arrangement made through the County Court where you pay an agreed amount off
your debts over a fixed period (normally five years) – the rest of your debts
are then written off after your final payment on the Individual Voluntary
Arrangement is made.
If you receive a sum of money that could pay most of your
debts (though redundancy, retirement, insurance pay out etc.), you could
consider a full and final IVA. This is where a one off payment of less than the
balance you owe is made to settle your debts with any remaining debt written
Why apply for an IVA?
- There is more flexibility than with Debt Relief Orders or bankruptcies.
- They can be a faster solution than Debt Management Plans.
- You are protected against further action from your creditors.
Who can have an IVA?
You need to have a disposable income without paying any of
your non-priority debts, typically of at least £80 per month for a low
contribution IVA, or typically at least £200 for a standard IVA.
How an IVA works
- You need to make an application for an IVA
through an Insolvency Practitioner (IP). Reading Borough Councils Debt Advice
Team can give you details of who you can contact.
- If your IP agrees that an IVA is the best option
they will help you complete a financial statement and prepare proposals for
- The arrangement has to be agreed by the majority
of your creditors (by value).
- You make the agreed payments in accordance with
the Court’s terms.
There is a cost to administer an IVA – this comes out of
your regular payments. Some IPs charge an additional up-front set up cost to
fully assess you for an IVA and take you through the whole process.
Always ask about
any charges before starting the process – you could make your situation worse
if you have to pay fees you haven’t planned for. Ask the Debt Advice Team or a
qualified advice agency for information about IP’s who do not charge up-front
- Alternative to Bankruptcy.
- No publicised.
- You aren’t bound by bankruptcy restrictions.
- You can continue to run a business.
- Assets like your home can be excluded if
- Creditors are bound by the IVA even if they
voted against it.
- Usually lasts a maximum of five years.
- Most insolvency practitioners allow fees to be
paid on a monthly basis as part of the IVA.
- An IVA will affect your credit rating.
- You must have high available income, lump sum or
- Costs are high and the insolvency practitioner
may want payment up front.
- You may still be made bankrupt if the IVA fails
because your payments are set too high.
- Your IVA’s may end if your circumstances change
and your insolvency practitioner can’t get creditors to accept new terms.
- Many IVAs have a built in requirement to revalue
your home and release any equity to pay your creditors – usually after 5 years
of payments – this only applies if you are a home owner.
Some companies will agree to set up an IVA even
if it isn’t suitable for you – and they charge high fees
Bankruptcy is a way of recognising that you are unable to
pay your debts in a reasonable amount of time, and do not meet the criteria of
another insolvency option (Debt Relief Order or Individual Voluntary
Arrangement) – it can be seen as last resort, but can be a good option
particularly if your rent you home and have no assets.
You can petition for bankruptcy yourself or a creditor can make you bankrupt. Your financial affairs will be dealt with by the Official Receiver. Once you are declared bankrupt your unsecured debts are normally written off, and you will have financial restrictions placed on you for the duration of the bankruptcy (which is normally 12 months).
- It can help relieve stress and anxiety.
- You can make a fresh start after a year.
- Your debts will be written off if you have no
- Your creditors can’t take further action against
you – except for debts secured against your home.
- You pay regular monthly payments for a maximum
of three years.
- It will affect your credit rating.
- If you own your home and have equity, you may lose your home.
- Creditors can take action to recover debts secured against your home.
- There is a bankruptcy fee of £680.
- Your assets may be sold by the Official Receiver.
- Some debts (like student loans, court fines, penalties for fraud, maintenance and child support) are not included and won’t be written off.
- Your employment may be affected.
- Your business may be closed down.
- You may have a ‘bankruptcy restriction order’ made against you for dishonesty or ‘unfit conduct’.
- The Official Receiver can take criminal action against you if you have committed fraud.
- Your bankruptcy will be published in the London Gazette and a local paper.
How it works
- You apply for bankruptcy online by filling in a form
- The cost of a bankruptcy is £680. You can pay by instalments before submitting the form online, or pay the full fee in cash at any Royal Bank of Scotland branch.
- Your application will be considered by an ‘adjudicator’ at the Insolvency Service, who will decide if you should be made bankrupt.
- If a Bankruptcy Order is made, your money will come under the control of the Official Receiver.
- You may be required to complete a telephone interview or attend an appointment to go through your paperwork in more detail with the Official Receiver.
- The Official Receiver will ask if you have any realisable assets which could be sold to pay towards your outstanding debts. They will also want to know if you have any disposable income in order to make a contribution towards your debts.
- Once the Bankruptcy Order has been made, creditors chasing eligible debts in your bankruptcy petition cannot continue recovery activity but they may still contact you.
- You will generally be freed from bankruptcy after 12 months and any outstanding debts included in your Bankruptcy Order will be written off in accordance with insolvency rules but you may have to make payments for up to three years.
- Your Bankruptcy Order will stay on your credit file for 6 years – you may have difficulty in getting credit during this time.
Responsibilities when bankrupt
- You must
provide your account books etc. to the Official Receiver – if you are
- You must
hand over any assets you have.
- You must
stop using bank accounts etc. until you have disclosed all of your affairs to
the Official Receiver – you can have 1 account for your income to be paid into.
not apply for credit of £500 or more without telling creditors you are a
Debt Relief Order (DRO)
A Debt Relief Order (DRO) is way to deal with your debts if you rent your home, have few assets and little disposable income. They are granted by the Official Receiver
If you have rent arrears get specialist advice before applying for a Debt Relief Order as there may be a risk to your tenancy.
If you have
- Your creditors can’t recover their money from
you without the Court’s permission.
- You will usually be free from your debts after
Who can have a DRO?
apply for a DRO if you can’t pay your debts and you meet all of the following
- You have qualifying debts of £20,000 or less.
- You have less than £50 a month left from your
income after you have paid your household bills.
- The things you own (your assets) and any savings
are worth £1,000 or less.
- Your motor vehicle (if you have one) must be
worth less than £1,000 – unless it has been specially adapted because you have
a physical disability.
- You have lived or worked in England and Wales
within the last 3 years.
- You haven’t applied for a DRO within the last 6
- It helps relieve stress and anxiety.
- There is no court hearing.
- You can make a fresh start after a year.
- Your debts are written off if they were included
in the DRO.
- Most debts can be included in the DRO, including
priority debts such as rent arrears, fuel debt and Council Tax.
- Once you have a DRO your creditors cannot take
- You have to find a fee of £90 but you can pay
this in instalments – much cheaper than bankruptcy.
- You won’t make monthly payments on your debts
included in the DRO.
- You can’t apply if you own your home as this is
counted as an asset.
- Secured creditors can still take action against
- Not all debts are written off. For example, you
cannot include Court fines, student loans, penalties for fraud, maintenance and
child support payments.
- If you forget about a debt, you cannot add it in
- Details of your DRO will be in the Individual
- This will affect your credit rating.
- You may have a ‘debt relief restriction order’
made against you for dishonesty or ‘unfit conduct’.
- There are some powers for the Official Receiver
to take criminal action against you e.g. if you have committed fraud.
How DROs work
- DROs are issued by the Official Receiver, but you must apply through an Approved Intermediary – contact the Debt Advice Team.
- There is a fee of £90 which must be paid in advance – you may be able to pay by instalments, but the Official Receiver will not consider your application until you have paid the fee in full.
- DROs usually last for 12 months – during this time you won’t make any payments towards the debts listed on your order.
- At the end of the DRO period all of the debts listed on your order will be written off automatically (you will still have to pay any unpaid debts not included in the DRO).
- Your DRO will stay on your credit record for 6 years – you may have difficulty in getting credit during this time.
Responsibilities under a DRO
Once a DRO
has been granted:
- If you apply for credit over £500 you must tell
the lender you have a Debt Relief Order.
- If you plan to start or run a business in a
different name from the one you declared with your DRO you must tell everyone
you do business with the name under which you were granted a DRO.
- Before you get involved with promoting,
managing, or setting up a limited company you must get permission from the
Court. You can’t act as a company director without this.
An Administration Order (AO) is an alternative to bankruptcy
and Debt Relief Orders if you have:
- At least two debts totalling £5,000 or less.
- A County or High Court Judgment (CCJ) against you.
How it works
You apply to the County Court using Form N92 – there is no
Once the Administration Order is made:
- You make a single monthly payment to the Court –
usually for three years.
- The Court will divide this payment fairly
amongst your creditors – less 10% administration fee to cover their costs.
- Your creditors cannot take any further recovery
action against you.
- At the end of the payment period you apply to
the Court for a Certificate of Satisfaction (this costs £10) as proof you have
settled your debts.
You must tell the court immediately if your circumstances change and you can’t make your monthly payments – if you don’t your AO could be revoked or suspended. An Administration Order is a public record and will stay on your credit file for 6 years.